Inflation Isn’t a Four Letter Word

By Peter Van Schaik

If you read the financial news and listen to the economic experts, you would
have to believe inflation is a four letter word relative to our economy. Not a day
passes when some pundit doesn’t warn us that inflation is about to rear its ugly
head and destroy our fragile economy. But, hysterics aside, is inflation something
to be feared considering the current state of our economy?
It is a fact that inflation favors the debtor at the expense of the saver. If
you are a saver, then inflation is definitely going to work against your best
interests. If the dollar you save today is only going to be worth 90 cents next
year, saving your money is a losing proposition since the interest rate you
receive on your savings will seldom exceed the general rate of inflation.
But the truth is there are few net savers in our economy. Most of us,
including the federal government, are burdened with debt and a dollar of debt
today that is only going to be 90 cents of debt next year isn’t necessarily an
evil to be feared. Paying back that debt is easier when the economy is expanding
and the debt, in real terms, is shrinking.
Do we need inflation to bail us out of the mountain of debt we’ve created?
Some economists don’t think so, but there is a flaw in their reasoning. It is
frequently said that we won’t have to inflate our way out of the current debt
situation since we didn’t need to in 1945 when federal debt was a far greater
percentage of Gross National Product than it is today. While it is true the
federal debt in 1945 was 120% of GNP compared to the 2008 figure of 45% of the
Gross Domestic Product, considering only the federal debt doesn’t provide an
accurate view of the debt problem.
It is the total debt in our economy, not just the federal debt, that clips
our economic wings. As 1945 came to a close the total debt, both fed and non-fed,
was 192% of GNP but in December of 2008 the total debt was 235% of GDP.
The non-federal debt (which includes state and local government, corporate,
non-corporate and individual debt) was only 72% of GNP in 1945. At the end of 2008
the non-federal debt was 191% of GDP. In other words, the private sector had the
ability to borrow and spend, therefore stimulating the economy, in 1945. That
allowed the federal government to pay down its debt without inflation and without
a post war depression. That situation doesn’t exist in 2009. Our economy is
already far deeper in debt than it was at the end of World War II.
We are in a position unparalleled in our history. Without some entity
borrowing and spending we cannot escape the recession. But we no longer can
continue to pile on the debt unless it decreases in value in real terms and the
easiest way to decrease the value of our debt is to inflate our currency. An
economy as deeply in debt as ours should be thankful for some inflation- it sure
beats a deflationary economic collapse.

Copyright 2008 – J. Peter Van Schaik